Mena financial institutions could play an important role in bridging Africa’s trade finance gap. In Cairo, GTR and JLT Specialty brought together a group of regional banks and corporates as well as London insurers to discuss the financing trends, appetite and challenges they face in their work across the African continent.
- Sherif Deknawy, UAE and Oman area manager, regional business development, Petrojet
- Moustafa El-Sahn, head of financial institutions, Attijariwafa Bank Egypt
- Stefaniya Ilina, class underwriter, political risks & credit, Axis Insurance
- Alastair McLeod, partner, credit, political & security risks, JLT Specialty (chair)
- Nick Oxley, underwriter, political risk & trade credit, MS Amlin
- Sarah Salah Eldin, Africa area manager, regional business development, Petrojet
- Islam Salem, CEO, Canal Sugar
- Michael Swainsbury, associate, credit, political & security risks, JLT Specialty
- Olivia Wright, underwriter, political risk & credit, Chubb
- Dina Zahran, head of trade centre, Emirates NBD Egypt
McLeod: Let’s talk about access to trade finance in Africa and the role that financial institutions can play in plugging the gap. The most publicised statistic is from the African Development Bank, which says the trade finance gap in Africa is currently at US$120bn.
Something we’ve seen in the insurance market is that in times when Western financial institutions have moved away from certain territories, quite often Middle East and North Africa (Mena) banks have managed to continue to finance business there. What are your main drivers for supporting African business?
El-Sahn: I see the trend of Western banks leaving these markets, with Barclays as an example. At Attijariwafa, we are very much interested in promoting intra-African trade; this is one of the main objectives of the bank today. We are now present in 14 countries in Africa. There is a lot of talk about intra-African trade, and we should step in and play a role, especially given that the government of Egypt is promoting these types of projects and activities.
I think everybody involved, not just Attijariwafa but the majority of the local banks, is focusing on Africa because the growth is there. The opportunity is there, the pricing is there. So you can really tap this market and generate a good amount of revenues.
Oxley: I’ve read that there is a high level of rejection rates in confirming letters of credit in Africa compared to other areas of the world.
El-Sahn: That is true. Because if you don’t live in the country or you don’t have a presence in the country, you don’t understand the dynamics or get a feel of what is going on. I think there is a lack of knowledge. Being in a country is how you can make a wise judgement about the credit risk.
Zahran: From our point of view, there is of course risk in Africa, be that political risk or economic risk, which is why the confirmation of letters of credit is a little bit difficult. But this risk can be covered through banks like the African Export-Import Bank (Afreximbank). We are trying to have a larger network in Africa without correspondents. Our bank is doing this, as are other banks. In this way, the risk starts to decrease.
McLeod: What role do Mena banks play in bridging the African finance gap? You have just said that the opportunity is there and pricing is good, and it feels like the setting is right. Are Mena banks doing enough given the strong cultural links and opportunities?
El-Sahn: At this stage, banks are still finding their way around. The idea of going into Africa is there, but I have not seen strong progress. But it will happen. The local banks will play the role in increasing penetration. I now see some banks in Egypt opening up offices in South Africa, Ethiopia, Uganda, so there is a tendency to move into Africa with rep offices here and there. They are developing the relationships, especially given that most of the banks in Egypt have a deposit ratio of an average of 55%, so they have got a lot of margin to lend to Africa. In two to three years, you will see a different picture in Egypt in relation to Africa.
McLeod: From the insurance side, are you seeing an uptick in enquiries from Mena financial institutions?
Ilina: We have seen an uptick, but the Mena financial institutions are still being educated by brokers regarding the utility of our insurance product. And to be perfectly honest, most of the enquiries that we have seen from Mena banks have been more Asia-related than Africa-related, and the enquiries are few and far between. So the Mena banks need to be better educated about the insurance product, and how they should use it.
We also don’t know whether we are seeing the full palette of their activity. We are probably seeing just a little part of what they are doing, because they will be purchasing insurance in countries where they have reached their limits, for example. So, I can’t say that what we have seen is representative regarding their interest in Africa, but I have seen articles in the press about Mena countries themselves investing in Africa. Only a couple of months ago I saw the UAE was signing an agreement with Ethiopia. So that’s positive.
Oxley: Our experience is similar in that we have been developing, over the last couple of years, relationships with a few Mena financial institutions, but most of their activity has been in countries like Bangladesh or Pakistan. But we would happily look at risk in Africa for those banks.
Wright: Africa for all of us in the market has been the bedrock of a lot of what we see and therefore structures that we are familiar with – financing large infrastructure and those kinds of projects. In terms of Mena banks, we are not seeing much appetite on that basis so far. But it’s something that would naturally fit with what we would look at and what we are comfortable with.
McLeod: There are so many positives with the increase in GDP growth in Africa: it was 3.6% in 2017 and is forecast to be 4.7% in 2018. There is a huge African population, which is set to increase exponentially over the next 20 to 30 years. There are major oil and gas discoveries around the continent. There just seem to be so many positives, albeit at the same time weighted down with challenges.
Ilina: We are constantly being approached by banks, especially European banks who are financing infrastructure projects, because Africa has a great need for infrastructure. We see a great chunk of what is happening in Africa by all the enquiries we get from European-based, UK and Japanese banks, who are very present on the continent. Obviously Chinese banks are there, too. We are very happy to support those kinds of infrastructure projects, depending on the structure and the level of comfort with all the participants within each of those transactions.
McLeod: What proportion of your book are African enquiries?
Ilina: For 2017 and 2018, we have written US$2.2bn of African exposure, and currently 30% of our book is African.
Oxley: Ours is 25%, so it’s probably quite similar. And a huge chunk of that is in certain countries, so that is one interesting trend. It is probably where you would expect: Nigeria, Kenya, Egypt, and particularly oil-producing countries. A lot of our exposure sits with the state oil companies, because we deal with a lot of international traders.
Ilina: Our enquiries on African countries really depend on the governmental programmes that are being developed. We see waves of enquiries, which is very interesting. All of a sudden, there has been a wave of enquiries in East Africa. Oil-producing countries, which we were not seeing very much 10 years ago, are now very frequently on our books. So it really depends on the government and what their vision is for the next five or 10 years, and how they decide to negotiate with the banks. If the government is calling the banks and asking for financing for infrastructure products, we see them immediately afterwards.
Wright: Exactly as Stefaniya says, a lot of it is linked to the sovereign debt and, for oil-producing countries, how much they are borrowing against their potential production. A recent example for us was a huge flurry of projects in Senegal – it was coming in every week. Then in the Ivory Coast, a lot of water projects were coming in, so it really does come in waves. You get your focus on one country and then it’s another.
McLeod: From the corporate side, are you seeing the benefits of finance coming through from either Mena or international banks, or support from the export credit agencies (ECAs)?
Deknawy: Not so much. We do a lot of visits to African countries and also some bank branches, but we don’t feel much of the benefits yet. This may be because we are just focusing on some types of projects, like oil and gas. They come with very tough competition: we have a lot of international and multinational companies working in these fields.
As you know, most of the opportunities we have in infrastructure or oil and gas need finance. So all the projects which are now floated in Africa are engineering, procurement and construction (EPC) plus finance. You need the finance before you can go to the country to get a project. This didn’t use to be our scope. We didn’t use to have these types of projects in the countries where we work, in the Gulf area and in North Africa. But now, we have to exercise this experience if we want to work in Africa.
We are now trying to make alliances with banks and insurance institutions to see what we can do. So far, we haven’t succeeded, and so we don’t feel that the banks are very interested to work in Africa and support companies like Petrojet to exploit the opportunities we have.
In April, I was in Mozambique for a conference. They have a financial problem: all their institutions and multinational companies are migrating from the country, because the risk is very high, the debt is very high. However, it is one of the most important countries for us. So, we will have to revisit our strategy for this country. Petrojet is not a small company: we have 40,000 employees, we have construction equipment and workshop facilities, and we are a major company working as an EPC. We are ready, and we can support African countries in their development, but we are waiting for the right opportunity which suits our company and can also mitigate the risk.
McLeod: Are you seeing any new financing trends?
Salem: What we have seen is that there is great appetite from liquid institutions, particularly ECAs and some European banks, to finance even long-term projects. However, they would like to see local institution appetite as well. They want to see that the local institutions have confidence in the country and in the transaction itself, and are willing to participate. That participation could be through guarantees from the local banking institutions so that the ECA doesn’t take the project risk itself.
We have been seeing this very, very strong appetite in the past six months. Although the market is liquid and the reserves in the Egyptian central bank are very good, it seems there is an attempt not to put immediate pressure on the foreign currency reserves for financing the import of equipment or capital goods, even if they are strategic products. This is really forcing us to speak to the banks and the international financial institutions for alternatives. And surprisingly, the appetite is there. We are seeing that the European Bank for Reconstruction and Development (EBRD) is very active, as is the International Finance Corporation (IFC) and Afreximbank. Euler Hermes and many other export credit agencies are active too. I am sure the reason for that is that the default rate has been extremely low in Egypt and some of the North African countries, and the success of projects has been high, whether it is private sector-driven or government-driven.
McLeod: Certainly from an insurance point of view, and talking more generally, the default rates in Africa are surprisingly low compared to other continents around the world.
Swainsbury: It is quite a common theme: the perception of risk compared to the actual reality of risk. We see it with some clients regularly. When you look at a project at the outset it can look like it will be very difficult to find support. However, when you look at all the individual factors together, it really does make sense as a whole.
El-Sahn: I have been in banking for 40 years, and I have not seen a single default under a letter of credit in Egypt – in good times and in bad. That gives you a feel about how things are working in Egypt, how banks are managed and how their position is with currency exposure.
Zahran: Even in the time of the revolution and when there was a problem with foreign currency, the Central Bank of Egypt was providing cover, so we didn’t face any problems. The central bank made some restrictions that documents under documentary collection should be received from bank to bank. But we never faced any problems in covering the payment for letters of credit (LCs), for guarantees or otherwise.
McLeod: We have witnessed this in the private insurance market on the LC side, through the difficult times in Egypt. When the pricing went up significantly insurers supported some of the Western banks who were confirming LCs for the major Egyptian banks. We had particularly good support from some underwriters, who continued to support throughout the whole process, and they benefited enormously from the pricing going up, but they were there standing behind the Egyptian banks. There was a lot of confidence in what the Egyptian banks were doing.
Oxley: I think you are right in that having a very strong central bank is critical to getting that confidence from abroad. It is probably a similar situation to somewhere like Lebanon, where there is quite a lot of underlying risk, or at least the perception of risk from the outside, but it’s an extremely strong central bank that has had no instances of default.
McLeod: Are Mena banks starting to do different things? Are they becoming more sophisticated with SME business on the continent?
El-Sahn: The Central Bank of Egypt is now imposing a directive that 20% of banks’ loan portfolio should be extended to SMEs. This has to be achieved by 2020. As a result, banks are now establishing their own SME departments and increasing their limits very aggressively. You have to attract hundreds of SME clients just to come up with one deal on the corporate side.
In Morocco, Attijariwafa Bank is very advanced in SME lending. It is going to tap those resources and apply the knowledge over here. The only issue is how to make any credit judgement on an SME. There is a big debate around how we can approach them. Some of them don’t have any financials, so banks will really have to do their homework.
Wright: The opportunity surely must be huge for someone who gets it right in terms of not only SMEs, but also micro-finance. Not only does Africa need huge amounts of infrastructure, but people now need individual bank accounts and that kind of thing.
El-Sahn: In Egypt, the unofficial economy is huge, and it is very strong. That is why the country has stayed afloat during difficult times, because of that strong unofficial economy. If you can tap this and put it into the formal economy, it will be a major success for taxes and for everything.
Salem: Some private sector companies try to fill that gap, and they have been working particularly in micro-finance, in Egypt and other countries.
In the Egyptian case for example, I know one company whose founders used to work for commercial banks. They saw that gap and founded a company. They started with very small outlets in different suburbs in Cairo and surprisingly, they have grown. They now have more than 200 branches all over the country. They have increased their capital more than 15 times in the past 10 years, and got acquired by one of the largest fully-fledged investment banks – because there is huge potential in that business. And surprisingly enough, the default rate that they see is less than 5%. This is from borrowers who have no financial history whatsoever, no score, they have never had a bank account, but it’s real people, real businesses, and it’s going very well.
McLeod: To finish with a more general question for the insurers, what recent geopolitical themes have affected your appetite on the African continent?
Oxley: We insure a lot of companies against events like expropriation, war, terrorism and other government actions against equity investments. We have certainly seen some quite aggressive regulatory action in certain African countries over the last 24 months. A well-publicised example is the MTN Nigeria fine. We have been particularly concerned about some of the Tanzanian government’s actions recently. In September, they withdrew from international arbitration and amended their public-private partnership laws. That has a huge impact on our willingness to support clients who want to invest in Tanzania.
It is a good example of certain countries moving away from established international bodies. Which, to be fair, is the trend that we have seen in America and the UK as well. It is not necessarily an African issue, but it is where certain countries that have huge potential seem to be moving in the wrong direction, which is a concern.
Wright: There have been much-publicised discussions about the potential for overheating of a lot of the Sub-Saharan African economies, which is where we get a lot of demand in terms of supporting the banks and corporates going into these countries. That’s something that people are keeping an eye on.
Currently, for example, speaking generally in the wider insurance market, there is a huge amount of Zambian exposure. Now, every day seems to be another headline of things not looking good, with even further restrictions on mining royalties and that kind of thing. International companies feeling comfortable and staying supportive in these countries is something that we all have huge concerns about. It’s about ensuring that we are backing the right players, those who are doing the right business on the ground, and who are definitely invested in the long term.
Ilina: One initiative we are closely monitoring, which is happening not only in Africa but in Asia as well is the Belt and Road Initiative. Of course, African countries are very attracted to it, because it is money for their infrastructure, which is much needed. But the question that always has to be asked is, at what cost? How much can the country’s balance sheet take on in terms of debt? That is something which I look at, and which worries me in terms of increasing debt levels in Africa.